#11 Finding Product-Market fit in Hardware

Adar: And our guest today is Nohtal Partansky. Nohtal is the founder and CEO of Sorting Robotics. They use computer vision and robotics to add efficiency to the cannabis wholesale market. Hello, Nohtal.

Nohtal: Hey Adar, how’s it going? 

Adar: I’m good. Did I describe it correctly? 

Nohtal: Yeah. Sorting Robotics is basically building robots for cannabis manufacturers and the robotics are obviously being much more efficient than the hand processes that people normally use today. 

Adar: What kind of hand processes do people use today in the cannabis industry?

Nohtal: Yeah, so there’s a huge range of processes that are done by hand. Our company specifically focuses on the preroll or joints sector and then also the vape cartridges. So one of our first products is a machine that infuses cannabis joints with concentrate material. And normally that will be done by hand, either by painting the size of a joint, then kind of like, rolling kief, or they’ll kind of hand mix it together with some powder, with THCA powder. And those are very labor intensive or not very accurate or reliable. So we introduced some automation to be both more accurate and considerably less labor intensive.

Adar:  Sounds interesting. And how did you choose this specific process to be automated? Like, what made you from the range of things that people do manually choose exactly that?

Nohtal: Yeah, it came from a few things, but the main reason was, at least on the joint infusion side, we helped build a co packing company in California. So a company in Oakland, California that was working with a lot of bay area brands to do their post processing and manufacturing. And so in that process, we got very intimate with understanding the actual operational side of the cannabis industry. And at one point in time, there was a customer that asked the co packing company, hey, can you come and do infusion? And they wanted to do it with the painting on the side and the rolling kief that was very labor intensive and very dirty and high spillage rate. And it was such a mess that kind of took that lesson and went back to sorting robotics and said, hey, this is a huge, glaring problem. Let’s solve this one. Because although it’s not a big issue now, at least in the overall term of the cannabis market, as the market grows, this issue will also grow, and then there’s a very high chance that that tamp within the cannabis market will also expand, just given the unique nature of the product line. And both of those have been proven very true.

Adar: Very interesting. So starting from customer feedback and also understanding that the market is going to grow and you’re going to grow with it when you solve that problem you’re going to be first to the market. 

Nohtal: Yeah. And even now we’re currently the only robotics company there’s any company at all that has an automated solution for infusion. And this weird thing happened which might be useful for those that are listening and deciding what to build because there’s already some automation companies in the space. But then none of them actually tackled this specific problem because it wasn’t really a problem when we did it. And then when we finally came to market it became very apparent. And then now it’s been a little over a year since we were selling these devices and then now it’s very clear this is a problem and we have a solution. So even though there are other automation companies in space, none of them tackled it. But it gives us very unique positioning where we’re kind of the only sophisticated operator that solves this problem. So the other sophisticated operators are actually looking to us to actually partner with us and either don’t want to develop their own computing technology or they could do it faster and cheaper by just using us instead. So it’s kind of a unique position and now there’s some opportunities that I don’t think we would have had if we did a different approach. 

Adar: Yeah, it’s very interesting but it sounds like a pretty big risk to take. We don’t have all the answers yet. What made you get that conviction to keep going in that direction? Because usually, you don’t know. Maybe it will not become a problem anytime in the future.

Nohtal: Yeah, I mean the time that we built that product and made that decision, we already pivoted like twice. So it was very much like this is our final fantasy sort of moment where hitting some of the other problems that were a lot more obvious, we’re actually also risky. Because if it’s very obvious but then there’s a whole bunch of competition, you can think you built the best thing, but it doesn’t really matter if you even built the best thing if there’s so much competition. Differentiating yourself is so difficult. Breaking through the market is so difficult. So I have a very strong belief that it’s much better to monopolize or own and be a leader in a small market, within a larger market than it is to be one of the competitors in a much bigger market just because you’re just competing. And competing sucks. 

Adar: You need to spearhead your way into the market and then expand. You have to be very focused and I think what you said here is very interesting. Hitting the obvious problems is risky. It’s almost like taking no risks is riskier than taking that risk. You mentioned pivoting, so I want to talk a little bit about that. Maybe your overall story. You started with magic cards, is that right? How did you get to the cannabis industry, that’s very interesting to understand.

Nohtal: That path was a journey. So we actually started with a device called the Rokus Order that we developed back in 2018, which was the first product of the company. And it’s actually the product that we developed and sold and kind of very quickly found product market fit. And that product market fit. And that development cycle is what allowed us to get into Y combinator in the first place. Because they kind of saw that small product, even though it’s to a very small marketplace, it showed that we could build products, we could talk to customers, we could deliver, and we could find product markets fit in a very short time frame in a very concise manner. And then once we are in Y combinator, we wanted to find a bigger market because the market for sorting children’s trading card games is not super large, as you might assume. And so then we spent about four months when we were in YC looking for a different market. And that basically meant I called probably like 50 different Y combinator founders. Actually, those are the ones that talk to me. I probably called a few more. And then they were like, yeah, I don’t want to talk to you random person, but I basically just did customer development for about four months. And after those four months, we found that it looks like the cannabis industry is like this blue ocean because it lives in this really weird gray area. You’re never going to have or not never. Like at the time around 2019, you’re not going to have huge conglomerates that could very much well service the market, actually move in. And because they’re not moving into the market, there’s a huge gap because it’s a growing industry that is needing to have sufficiently buffered margins because eventually those margins become compressed just due to overall supply and competition. But they don’t have the automation to scale very well. And so that’s where startups live in the gray, right? If startups live in the gray area, like, going to the gray area of cannabis was a very easy sort of transition. And so then that’s kind of how we settled on cannabis and then how we settled on this type of product was like a few more steps in between. So yeah, but that’s how we settled in the industry.

Adar: Did you use your existing technology for sorting cards in the cannabis industry? Did you use something from before you made the pivot or it was like clean slate, let’s start over again?

Nohtal: Yeah, nothing. It was kind of unfortunate. Honestly. It would have been great if we could have done that. 

Adar: Yeah, I think there’s a lesson here because sometimes you have to clean everything. It’s hard. It’s hard to detach completely. You convince yourself that you have something that you can use. But sometimes it’s great if you can just start all over again. You have to have a lot of, I guess, guts to do that. 

Nohtal: Yeah, well, I mean, you can also be wrong too, right? So you kind of mentioned like, choosing that idea, like the infusion machine. We did something in 2019 which was like a biomass rotation system, which in theory made a ton of sense. And then we actually made some money off of it. We found out that it just couldn’t scale and not for any reason it’s the technology, but the marketplace. There are too many variables to scale that business process. So that was highly unfortunate and that was one that we got wrong. And then we kind of worked on this co packing company and helped build that to really, really learn about the industry and then kind of go back to our roots where we’ll know the customer by being the customer. So we kind of became the cannabis manufacturing person by helping us copying company, learning all this knowledge, and then after that, way more educated to actually build to that industry. And so that’s kind of what derisked it a little bit more, because the first time it was I mean, I think we’re way more confident about the biomass rotation system than we were even about the infusion machine, because from an outside perspective, that one made a lot more sense because it was mirrored in a bunch more industries. But there’s all these weird caveats that come with cannabis. And so then when we made the infusion system from the outside perspective, it didn’t make any sense. But then for us, it was, well, this seems like a better idea than the other one. That was our third pivot. I guess.

Adar: That’s the nice thing about startups where you can take bigger risks because sometimes you’re just stuck in a corner and then you can sometimes come up with the greatest ideas. Let’s maybe talk about the challenges. You seem to have highly custom products and low volume, high mix, usually that way in the robotics industry. What are some of the challenges in building high-quality supply chain around that?

Nohtal: Yeah, I would say in general, if you ask that question, like two years ago, there probably wouldn’t have been too much stress around it. But given the global economic environment or the global political environment, now there’s like a lot of stress because supply chains are being stressed through the final whiplash of COVID that we finally are seeing and it’s becoming very apparent. And then also the social unrest that is in Ukraine. And then I think did I just see that? Like the US embassy in Baghdad got bomb today or something like that? Was that today? I don’t know. I saw a YouTube short clip of the embassy getting bombed and I was like, what is that? I didn’t really look into it, whatever. But then you got China making weird moves to Taiwan, and so it’s kind of a limbo stressful because it’s like if China decides they just want to support Russia and collapse Ukraine, or if they decide that they’re going to pull Russia on Taiwan, so what does that do? Because both China and Taiwan are suppliers. It kind of drives you to start really diversifying and then thinking about how many of these am I going to get? How many of these chips or how many of these needles or how many of these parts am I going to get? Like, am I going to have to assume that it collapses? I mean, start thinking about random things that don’t really occur to, a normal person. 

Adar: Yeah, it’s interesting, and I think that since you’re one of our customers, you specifically are focused on automating manual tasks yourself in your company. I’m very interested to hear how you think about it. Like, what made you do that shift to working with us? 

Nohtal: Well, I mean, we had talked, like, in your very beginning stages, right. I think you guys were still in YC, right? When we first had a conversation, you’re still in the batch. And so it was cool just to see what you guys were doing initially. And then when you reached back out after a few I think it was maybe a year, right, from when we talked about. And your tool became very, like, a lot more robust. And it was very similar to the tool that we’re kind of using in house to manage our supply chain and manage our ordering. And so we, like, took it for a test run. And then really, it was one of my engineers who was like, oh, this is like, what we do in house, but it’s just a lot easier, and it saves me time, and I can send out quotes directly from the system, and I don’t have to make, like, several spreadsheets for every ordering. I can kind of make it in this internal tool and, like, the blocking out of the purchases is controlled inside of here, as opposed to, like, several different settings spreadsheets. Like. Okay. That sounds cool. It was a math equation too, right? We were like, is it going to save us the money of my engineer over this time? And if it is, then it makes sense. It’s a pretty easy sell once the ROI there. So, it was very straightforward like, it was so transferable between our internal tools.

Adar: Sounds interesting. I think that not every company thinks that way in a very cold way to how do you save time? And I think maybe because you deal with automating a lot of manual tasks yourself, then thinking that way becomes very, very clear, like, you know the ROI very easily. I’m interested also, to hear about the regulatory aspects. Do you face any challenges with that? There’s a big issue, obviously, around the cannabis industry.

Nohtal: Yeah, I mean, we’re not a plant-ouching company. We don’t handle the cannabis plan. We don’t do anything even near it, even on the unregulated CBD side. We don’t really mess with that. We’re like Toyota, right? We sell robots to people and they do with it what they will. We don’t do revenue share. So when it comes to regulations of our products, we’re not really so concerned about the cannabis regulations when we’re kind of helping out the co-packing company in Oakland. We got a lot of experience in the regulatory environment from a cannabis operator perspective. And in California, it’s pretty strict, it’s pretty all over the place, and especially with the operators in the space. A lot of them are first-time business owners. And you’re asking, first-time business owners to basically run a medical device company with that much regulation. And then you’re asking them to run it with that much regulation and with an extreme amount of taxes. That is a recipe for disaster. And California is in its second wave of company collapses because of boom-bust cycles that are just like some new money coming in or prices fluctuating so deeply and allowing for liquidity to expand and contract. And it’s kind of a mess. The regulatory environment with the legality and the implications on taxes, it’s pretty stressful. And a lot of the new markets in the different states also go through these cyclical boom-bustbus cycles as they’re becoming online. And only now places in Colorado and Oregon are kind of stable, but like they’re eight years in. 

Adar: I think it impacts you a lot, even though you’re not dealing with the plants themselves. Any regulatory change is going to affect your customers and also affect your products eventually. But it seems like it’s going in the positive direction for you. Is that right?

Nohtal: For the company? For sorting robotics? Oh yeah, for Sorting Robotics things are going well. Things are going great. Yes. We see that a lot of our growth doesn’t come from mature markets. A lot of our growth actually comes from the nascent markets. And then it kind of whips around to the mature markets because the mature markets, they kind of already have their thing and they’ll only adopt new technologies even if it has like, massive cost savings or massive efficiency gains. They just like, are so scared of changing what works because it’s like one misstep is $100,000. But the new markets, usually they have a lot more capital to kind of experiment with and then they don’t know what to do, and so they want to start it out the best they can. So they’ll usually adopt new technology to start off the right way. And so that’s kind of what we’re noticing here because there’s new markets turning on all the time. And we have only been selling our first product for a year and our second product for a few months. There’s still a lot of headers for us to go.

Adar: And you’re almost growing with the market, is that right? When you’re growing with the early adopters that are building their businesses with you, that’s probably the best way to get going and then get the more mature players.

Nohtal: What we found is that getting a market leader in a nascent market or in a new market is exceptional because then very quickly, the lower ranked market participants will just copy them and then we’re basically an arms dealer at that point. Like, the big guy has the new gun, so everyone wants the new gun. And so we’re like, yeah, I’ll sell it to you.

Adar: Yeah, exactly. Nohtal, it was fascinating. Thank you so much for being with us today.

Nohtal: Yeah, for sure. Thank you for having me on.